The Pentagon is claiming to make room for small companies, however in observe it’s reinforcing a brand new class of giants, and propping up legacy firms. Regardless of coverage shifts, the Protection Division’s urge for food for consolidation stays as sturdy as ever, leaving small companies on the menu, not on the desk.
At the moment’s protection market consolidation mirrors the patterns that adopted the notorious “final supper” of the Nineties. Whereas rising protection expertise firms place themselves as disruptors, they comply with remarkably related consolidation playbooks to these utilized by the primes they declare to problem. The outcome is just not the various, resilient industrial base wanted for future challenges, however somewhat a brand new revolving triangle of affect connecting Pentagon management, technology-focused contractors, and enterprise capital corporations.
The Protection Division ought to improve enforcement of its established small enterprise insurance policies, making certain real alternatives for innovators whereas breaking the cycle that rewards previous efficiency over contemporary options, thereby sustaining the army agility important for addressing evolving threats. To make certain, I’m not a impartial celebration: I work for a agency referred to as Protection Business Advisors that helps small companies succeed with the Protection Division. I consider within the mission and as a former servicemember I perceive how important it’s for essentially the most progressive firms to have an actual shot at delivering capabilities to the warfighter.
The Put up-Chilly Struggle Distillation
Because the Soviet Union collapsed and the Berlin Wall fell, the Division of Protection confronted a dramatically altered strategic panorama. The existential menace that had formed American protection coverage for practically 5 a long time had vanished virtually in a single day. The peace dividend promised lowered protection spending and, with it, a smaller industrial base. When Protection Secretary Les Aspin gathered business leaders for the “final supper,” the message was clear: consolidate or disappear.
The merging of the defense-industrial base within the Nineties created clear horizontal market leaders outlined by an period dominated by platforms: Lockheed Martin claimed the skies, Common Dynamics commanded the land, Northrop Grumman secured area, Raytheon dominated missiles and electronics, and Boeing straddled industrial and army aviation. This horizontal segmentation mirrored the strategic realities of late Chilly Struggle army doctrine, the place distinct domains of warfare operated with relative independence. Army operations have been compartmentalized by service branches with distinct necessities, budgets, and acquisition processes, naturally main protection firms to arrange themselves round these similar domain-specific buildings.
The Army-Industrial Situation… I Imply Complicated
Three a long time later, historical past seems to be repeating itself, although with a vital twist. Whereas the Division of Protection’s small enterprise technique claims to decrease limitations to entry, in observe, it’s reinforcing a brand new class of giants. Former disruptors like Palantir now drive the narrative championing the worth of protection primes whereas posting document inventory positive aspects. Palantir’s standing as a constant prime 5 inventory performer, even in right now’s market, underscores the irony that yesterday’s industrial base diversification answer has grow to be right now’s new protection institution.
The irony is that right now’s protection expertise firms, whereas positioning themselves as disruptors, are following the identical consolidation playbook that created the primes they declare to problem. Anduril acquired Dive Applied sciences, Copious Imaging, and Blue Pressure Applied sciences. Defend AI bought Martin UAV and Heron Techniques. These acquisitions are a lot smaller than the massive maneuvers that shored up market segments within the Nineties, like Lockheed buying Martin Marietta, Northrop merging with Grumman, or Boeing with McDonnell-Douglas. Nonetheless, the aim of capturing a brand new market phase is identical. It’s primarily the dimensions and timeframe for return which are completely different.
The army’s doctrinal shift towards ideas like joint all-domain command and management acknowledges that future conflicts will likely be received by forces that may function throughout domains with velocity and coherence. As warfare turns into extra built-in throughout domains, protection firms are consolidating to reflect this integration. The outcome is just not better range and resilience within the industrial base however better focus, a development that straight parallels the post-Chilly Struggle consolidation.
As america confronts this new period of great-power competitors, the query is just not whether or not right now’s protection expertise firms are completely different from their predecessors, however whether or not the ensuing industrial base will likely be sufficiently numerous, resilient, and progressive to fulfill the challenges forward. Historical past suggests we must be skeptical.
Patriots and Enterprise Capitalists
Regardless of the consolidation developments, each previous and current, I consider the elemental motivation for these collaborating within the protection business stays the strengthening of the warfighter. At the moment’s rising market leaders, very similar to their predecessors, will not be maliciously pursuing dominance for its personal sake. Somewhat, they’re positioning themselves as suppliers of related vital capabilities delivered on the high quality and scale required by fashionable protection wants. In distinction to the sooner commentary of Palantir’s promotional stance regarding the advantage of protection primes to america, Shyam Sankar started (and continues) to confer with a “first breakfast” phenomenon, arguing that established protection contractors habitually devour smaller progressive firms by acquisitions or by exploiting incumbent benefits, successfully stifling true innovation.
Mockingly, as newer entrants achieve market share, they more and more face the identical strategic pressures towards consolidation they as soon as criticized. These firms acknowledge that addressing complicated, multi-domain challenges demand built-in options that smaller, fragmented organizations wrestle to offer. The consolidation we observe is much less about eliminating competitors and extra about creating entities able to delivering complete capabilities that meet more and more refined army necessities. This consolidation ends in vendor lock, the place just one built-in entity possesses the aptitude to deal with complicated necessities. This dependency creates important downstream challenges for the federal government. When a single prime contractor owns and manages a complete program with out viable rivals, sole-source contracting turns into inevitable. The absence of aggressive alternate options severely undermines the federal government’s negotiating place, making it terribly tough, if not unattainable, to safe truthful and affordable offers. The prime contractor wields disproportionate leverage, dictating phrases, timelines, and prices with minimal accountability. With out built-in mechanisms to problem these consolidated entities or plans for potential substitute, the federal government turns into perpetually captive to the prime’s calls for. This imbalanced energy dynamic finally compromises each cost-effectiveness and innovation in protection procurement, reinforcing the very inefficiencies the system initially sought to remove.
At the moment’s complicated battlespace appears to necessitate the fast injection of money to maneuver from prototype to manufacturing. Enterprise capitalists have crammed this void of presidency analysis and improvement funding. The result’s a new revolving triangle of affect. The place energy as soon as flowed between Protection Division management, conventional consulting corporations, and protection primes, right now’s triangle connects departmental management, technology-focused protection contractors, and enterprise capital/personal fairness corporations. The gamers have modified, however the sport stays remarkably related.
A System Constructed for Repeat Winners
The consolidation inside the protection business, each amongst established primes and rising gamers, responds to complicated army necessities demanding built-in options. But this creates a paradox inside Small Enterprise Innovation Analysis applications supposedly designed to foster innovation. As consolidation absorbs smaller innovators to fulfill Protection Division wants, Small Enterprise Innovation Analysis concurrently reinforces this focus by favoring repeat gamers, making a system the place established relationships trump contemporary concepts and leaving actually progressive small companies caught between market pressures and systemic entry limitations.
Regardless of rhetoric about supporting small enterprise innovation, the statistics inform a special story. Detailed evaluation from the Nationwide Academies of Sciences, Engineering, and Drugs and the Authorities Accountability Workplace reveals that small enterprise innovation analysis applications have grow to be a revolving door of acquainted faces. These firms, typically known as “SBIR Mills,” have drawn scrutiny from lawmakers like Sen. Joni Ernst, who has sponsored laws to deal with this subject of perpetual funding that diverts sources away from actually progressive non-traditional firms and new entrants.
The Nationwide Academies report reveals that the Division of Protection’s small enterprise innovation funding reveals troubling incumbency bias, with 40 p.c of awards from 2016 to 2020 going to only 11 p.c of firms. Companies with 5 or extra prior awards see success charges practically triple these of first-time candidates. The Authorities Accountability Workplace’s evaluation reveals related figures, with first-time awardees representing lower than 15 p.c of recipients whereas 20 p.c of funding goes to firms with 30 or extra earlier awards. The highest 1 p.c of awardees, about 50 firms, seize 12 to fifteen p.c of whole funding, and corporations with prior awards are 3 to 4 instances extra prone to obtain new ones.
Transition Packages That Reinforce Limitations
The issue extends past preliminary awards to the transition applications meant to assist firms commercialize their improvements. Packages just like the Navy Transition Program, the Military Utilized Small Enterprise Innovation Analysis Program, the AFWERX Undertaking Small Enterprise Innovation Analysis Open Matter Program, and the Navy Transition Help Program all declare to help innovation, however their choice standards closely favor these already within the system.
The Small Enterprise Innovation Analysis program operates in phases, with Section I offering preliminary funding to check the feasibility of progressive concepts. Section II awards are a lot bigger and are supposed to additional develop promising ideas from Section I into potential services or products for presidency use. The Section II conversion charges (the proportion of Section I awardees who obtain the extra substantial Section II funding) spotlight this bias. In keeping with the Nationwide Academies, firms with three or extra prior awards have Section II conversion charges approaching 70 p.c, whereas first-time awardees hover round 25 p.c. This disparity exists regardless of impartial technical evaluations displaying no important distinction within the high quality of proposals.
A Closed Ecosystem
These statistics reveal a elementary fact: The Small Enterprise Innovation Analysis program has developed from its authentic function as an innovation pipeline into one thing resembling a closed ecosystem of most well-liked distributors. Packages just like the Navy Transition Help Program and the assorted service-specific small enterprise innovation analysis initiatives have grow to be gateways that few newcomers can cross by, whatever the advantage of their concepts.
The result’s predictable: True disruption not often emerges from inside this method. As an alternative, essentially the most progressive protection applied sciences of the previous decade have come from firms that originally bypassed the small enterprise innovation analysis course of solely, securing personal capital to develop their choices earlier than approaching the Division of Protection.
If the Pentagon genuinely needs to harness small enterprise innovation, it ought to confront these statistics truthfully. A program the place previous efficiency trumps potential, the place familiarity outweighs novelty, and the place the identical firms win yr after yr is just not designed to supply the breakthroughs wanted to deal with rising threats. It’s, somewhat, a subsidy program for established gamers masquerading as an innovation initiative.
Discovering Options in Present Ecosystems
Whereas protection giants have traditionally dominated army contracts by their mastery of complicated federal acquisition rules, the Division of Protection’s rising emphasis on Different Transaction Authorities may essentially reshape this panorama for small companies. Latest government orders set up “a primary choice for industrial options” in protection acquisition, creating streamlined pathways that allow non-traditional contractors to bypass the bureaucratic hurdles that beforehand secured the incumbents’ benefit. Proof of this success is evident: 68 p.c of Different Transaction Authorities contracts by the Protection Innovation Unit have gone to small companies, straight difficult the oligopoly that has lengthy characterised protection procurement.
The Business Options Opening course of developed for Different Transaction Authorities permits the Division of Protection to ascertain “quick, versatile, collaborative” contracts with progressive firms exterior the standard protection sector. The beforehand talked about government order on protection acquisitions strengthens this dedication by directing procurement officers to prioritize industrial options whereas restructuring efficiency evaluations to reward workers who implement these approaches.
As mentioned in these digital pages, the protection secretary’s current memo on software program represents a paradigm shift in protection procurement. Past merely altering contracting strategies, this memo may revolutionize the protection industrial base by attracting industrial expertise firms that historically keep away from working with the Protection Division. The protection secretary’s directive creates an unprecedented alternative to harness the $43 billion in personal capital presently being invested in dual-use expertise firms.
These reforms may remove among the bureaucratic hurdles that beforehand prevented smaller firms from competing successfully. Because the Protection Innovation Unit explains, “After a profitable prototype, the connection can proceed and develop,” permitting small firms to construct credentials by preliminary contracts and compete for bigger alternatives. This creates a sensible answer to the Catch-22 that beforehand trapped small companies, establishing a transparent path from preliminary engagement to sustained protection partnerships.
Protection Division officers have highlighted how this strategy opens doorways for smaller firms. The outcomes converse for themselves: Since 2016, Protection Innovation Unit has awarded over 500 Different Transaction Agreements, with 88 p.c going to non-traditional contractors and 68 p.c to small companies. Their transition fee from prototype to manufacturing has improved from 35 p.c to roughly 50 p.c lately. To this point, the Protection Innovation Unit has delivered greater than 80 prototypes, with 52 efficiently transitioning to the warfighter. These improvements have attracted over $30 billion in personal funding and embody applied sciences quickly deployed to fulfill pressing nationwide safety challenges.
A Extra Costly and Convoluted Dinner Celebration
Three a long time after the unique “final supper,” the Division of Protection finds itself internet hosting one other gathering, one through which the desk is bigger, the menu pricier, and the visitors nonetheless too few. The division claims to need innovation, range, and agility, but continues setting locations solely for many who already know the seating association. The chance is evident: An industrial base outlined by consolidation and incumbency could also be handy, however it’s neither agile nor adaptive sufficient to deal with the threats of the trendy battlespace.
For small companies searching for significant participation, survival typically relies upon not on the power of their concepts, however on the power of their connections. Mandates and directions supplied in new memos and government orders supply real promise, however success will depend on whether or not the Protection Division absolutely commits to leveraging them at scale somewhat than as token gestures.
Assembly the challenges of future threats would require greater than reshuffling seats round a well-known desk. It calls for many tables, the place a bigger variety of contemporary firms form the long run. Solely then will the Protection Division guarantee its industrial base stays resilient sufficient not simply to duplicate previous victories, however to realize these but to return.
Nicholas Hooper is director of progress and technique at Protection Business Advisors. He’s a former U.S. Military intelligence officer, with previous roles at Boeing as a senior technique analyst and enterprise improvement consultant. Hooper’s core expertise is in analyzing protection acquisition developments, aggressive market dynamics, and strategic consolidation patterns throughout the protection business.
Picture: Midjourney
